The future of the OBR with Ed Conway

0:00Coming up, after it's accidentally leaked the entire contents of the budget, the Office for Budget Responsibility might need at least to consider a name change. So, is it time to reform the OBR or abolish it?

0:15Ed Conway:How does a banana trigger a CIA-backed coup? Do AirPods herald the arrival of a new global order? What do LED lights say about the future of humanity? I'm Ed Conway and in each episode of my new podcast Stuff Matters I take an object, crack it open and reveal the world-shaping forces hidden inside. This is economics told through the things we think we understand. Search Stuff Matters on your podcast app to listen and follow. It's hard enough being Chancellor on Budget Day. Harder still when the body designed to mark your homework, leaks the whole thing before you've even got to your feet. But that's exactly what happened to Rachel Reeves, thanks to a black hole-sized blunder by the Office for Budget Responsibility.

1:02In recent years, the OBR, which definitely doesn't stand for Office of Bleak Realism or Office of Budget Ruination, well, it's found itself in an all-important role. It takes the budget, looks at it, shakes it, sniffs it, and works out if the numbers add up, literally. But its calculations and predictions cast more than a shadow over the day. They directly affect the decisions any Chancellor can make, which is why it's not just Rachel Reeves with an OBR bee in her bonnet. Here's Sir Keir Starmer. The OBR have scored nothing against any change here. The assumption is not a single person changes their behaviour.

1:39I personally struggle with that way of looking at it. And the criticism isn't solely confined to the Labour benches. Remember Liz Truss? I don't agree with the OBR forecasting methods. I think the OBR should be abolished. I think it's been detrimental to British policy. So with political opposition from across the Commons, is it time to think again? What is the OBR? What's it for? And might it actually have become much too powerful? I sat down with our economics editor, Ed Conway, to find out. I mean, Ed, let's just reflect on what actually happened on Budget Day. I mean, do we actually know yet what happened?

2:20Ed Conway:No, not in detail, but it looks like basically they had uploaded the PDF, so the file that contains the economic and fiscal outlook, which is basically, that's the budget. So on Budget Day, there's two big documents that are produced. One of them is the budget itself, which is the kind of the red book. That's the one the Treasury produces. and then there's one that the OBR produces which is a kind of pale shade of blue Manchester City blue and and um but to be honest with you you can kind of get everything from the OBR book so when they inadvertently published that it was monumental and I think basically they had it up on their website to be honest with you which journalist hasn't knowing that there's a document coming kind of guessed what the name might be and just see if they've actually uploaded it or whether they've just kind of put it up, but they haven't made the link live.

3:13Ed Conway:What has happened is they have put it up and, you know, hoped that no one would guess the address of the PDF. But someone did on Royce's looking at the metadata, it looks like it might have been up, you know, for hours and hours beforehand. She stands up at about 1230 to give the budget speech. This stuff started to dribble out in about 1145. But I noticed it pretty quickly, because of the market reaction. So I was I was watching the screen. I'd just come out from our studios and I was watching the screen and looking at what was happening to guilt yields just because that's something we do around budget day.

3:48Ed Conway:And they started to fall quite sharply. And I said to - This is the cost of government borrowing, yeah? Cost of government borrowing. This is the key metric that, you know, that obviously went haywire after the mini budget. And so we pay attention to it even more now than usual. And I kind of actually saw this going down and I said to my producer, Itha, who was sitting next to me, I was like, something going on here. because this is moving much more than it normally would. And then she checked the wires to look, and then she saw that Reuters had said OBR says X and Y and Z. Yeah, well, I was sitting watching you on the telly yesterday, Ed, and I couldn't quite work out whether your reaction was cock-a-hoop, look at this, we get access to the budget ahead of time, or whether you were actually genuinely gobsmacked that something of this scale could have happened.

4:31Ed Conway:No, I was gobsmacked, because I've been doing this for, you know, 20 years or so, and nothing close to this has ever happened before. And usually so much care is taken to ensure that this doesn't happen, even with documents that are not market moving. But this is the ultimate market moving event. You've got hundreds, thousands more perhaps investors around the world watching to see what the Chancellor is doing in order to try to kind of work out whether they're buying or selling UK government securities or indeed other forms of securities. it's massive and the fact like i say that that it caused the market to yo-yo around is is enormously consequential and also you know my my routine for the day was completely changed who cares honestly pragmatically maybe it's nice to liven things up but but the interesting thing is and this this goes to the point of i guess of the ovr as well is that normally um on budget day what happens it's it's a it's a you know well-rehearsed sequence the chancellor stands up and gives the speech and talks about all of the exciting things that she or indeed he is doing.

5:40Ed Conway:And then maybe there'll be an announcement and no one will think much of it because it was almost an aside. Then they sit down, she sits down, and then this stuff is published. And all of a sudden, you see the bones of the budget. You see how much each measure is worth. And for instance, this time around, the mention of salary sacrifice, what they're doing to pension schemes, it was almost a throwaway line in her speech about this loophole that needed to be closed because a lot of rich people were making the most of it. Well, then you get to the actual documentation, it turns out that's going to raise 4.7 billion pounds, which is loads of money in comparison with normal measures, and suggests a lot of people are going to pay a lot of money.

6:23Ed Conway:And because this time around, we had seen that before she even stood up, let's say it shone a different light on it. And you didn't have that normal kind of roller coaster of revelation, but instead you had this kind of roller coaster of everyone trying to download this file at once and then trading on it, which is kind of what happened in markets. I suppose what you're also pointing to there, Ed, is the ubiquity now of the OBR when it comes time for a financial statement like the budget. But it wasn't always thus, was it? I mean, actually, the OBR is a pretty recent invention. Yeah. And then the sweep of fiscal events is pretty new.

6:58Ed Conway:It was set up in 2010. It was the Conservatives under George Osborne. Rupert Harrison, actually, who was George Osborne's advisor. It was his brainwave that cut to some extent learning from what was happening in a few other countries in the world. In particular, in the US, there's something called the Congressional Budget Office. In the previous years, for as long as anyone could remember, when the Chancellor did a budget, they provided all of their own sums. So they said, we think the economy is growing by this much this year. We're going to do this much taxes and we think it will raise us this much money.

7:31Ed Conway:And there was always a suspicion that as a result of them having everything in-house, they could basically fiddle the figures slightly or massage them to make them more kind of favourable. So George Osborne was in essence saying, you know, look, politicians can't trust politicians. It wasn't that people fundamentally doubted the numbers that the Treasury was producing back, you know, pre-2010. It was just that because they could control everything, Rupert Harrison, George Osborne, what they basically said is, let's create this body within, it's kind of independent, but it's obviously somewhat part of government, whose job it is to do the forecasts and to essentially kind of score all of the measures that the government is going to try and introduce.

8:15Ed Conway:I think in institutional terms, it was great success. Subsequent governments have all embraced it. And actually all around the world, there's other organisations that have been set up in other countries to do similar things. And it gets to this bigger point of like, you know, maybe in certain economic decisions, you need to have experts looking at things, dare I say experts, that word, looking at things rather than trusting politicians to do everything. OK, so how do they do what they do? How do they come up with their kind of scorecard at the end of it? I mean, I suppose what Budget Day has demonstrated is that the OBR has access to the budget and has quite early access to the budget, I would assume.

8:56Ed Conway:Yeah, they do. Well, I mean, they're part of the process. So in the weeks and the months running up to the budget, what will happen is the OBR will do like a forecast and say, this is what we think is happening to the economy. And as a result of growth being stronger or weaker than we expect, that means you've got less tax revenue or more tax revenue coming in than you expected. So it's the bedrock for a budget is basically saying, look, here's where you are. Here's how things are going. So then the kind of ball is passed back to the Treasury and they need to then decide, OK, we're going to raise taxes or cut spending or kind of be OK with extra borrowing.

9:30Ed Conway:But the critical thing is, it is up to the OBR itself, this organisation, relatively small organisation, it's only kind of 50 or so people. Well, who are we talking about? I mean, who's actually doing this work? This guy called Richard Hughes, former Treasury official, quite senior Treasury official, very well regarded in the Treasury. And it's him with another two people. So there's always been this body. It's called the Budget Responsibility Committee. And they're a committee of three economists who are, you know, come from institutions like the Bank of England, also from the Treasury. There's a team that does some of the numbers and the data and the spreadsheets and the famous report that was released online inadvertently.

10:13Ed Conway:But basically, it's up to those three members to decide, OK, this is kind of what we think is happening with productivity right now. Because ultimately, economics, for all that there's a lot of spreadsheets and a lot of data behind it, there's a lot of judgment as well. And the OBR has to make judgments about what they think is going to happen to the long term trend growth rate of the UK, for instance, which depends on all sorts of factors. Does anyone actually really understand what growth is created by? We know that there are a number of factors, but you don't have a formula for it. So presumably the OBR doesn't have a formula for it.

10:46Ed Conway:This is very dangerous territory now. The emperor maybe has no clothes in economics as a whole. Yeah, I mean, like, in short, no one who really understands economics would pretend that anything is definitive. There's evidence as well. And you base your judgments on evidence. But frankly, there's also hunches. and people within economics need to have hunches. And to some extent, what we see every kind of time the OBR comes up with new numbers is they're hunched based on a lot of data and a lot of evidence, but they're hunched on kind of where things are heading in the future. And it's basically those three people, three, it's worth saying, unelected officials who are making big decisions because those decisions determine how much room the chancellor might well have to spend or tax in the future.

11:34Ed Conway:but the key thing that we were talking about in the run-up to this budget not just us but kind of everyone because that's kind of this is what the treasury and various officials and the chancellor were hinting at was that the obr was about to take a big decision there was this kind of sense they were going to downgrade things and it was going to be grim and grisly and the chancellor was going to face this and she was going to have to do something about it and what the things she was going to do about it was make well maybe it was going to be so serious she was going to have to raise the basic rate of income tax which is i remember that yeah do you remember that not that long ago.

12:04Ed Conway:Well, now it turns out the document came out a little bit earlier than expected, but the document came out and it turns out the downgrade was far less small than anyone had anticipated. Less small even than the best case scenarios that people that looked at at the start of things. Is this why there has been this increased level of criticism coming from not just the body politic, but from the politicians themselves, that we are in essence, you know, farming out government strategy to a body which reports on the basis of hunched educated guesswork. It's kind of the same as with the Bank of England and when it was made independent in 1997.

12:41Ed Conway:Most people tended to think that was kind of a good idea because politicians, you know, them being able to decide interest rates and all of their kind of tax and spend policy at the same time meant there was a lot of room for them kind of creating booms and busts. But then, you know, along comes something like the financial crisis and the Bank of England starts doing quantitative easing, quite controversial policy, printing lots of money, creating assets, buying assets, all of this stuff. And then suddenly people surface and say, well, was it such a good idea? Here's why I think it's kind of the OBR is a trickier sell than something like the Bank of England being independent, because central banks, you know, there's a history of independence of central banks that goes back many, many decades, you know, the Federal Reserve in the US has been independent, you know, I know Donald Trump tries to lecture it, but it's been independent for a long time.

13:30Ed Conway:European Central Bank has always been independent. Whereas when it comes to taxing and spending, the idea that these decisions are going to be strongly influenced by unelected officials, I think that's an interesting and chewy question. I think the OBR is an important institution, actually. And to the extent that you need to be realistic about what it can and can't do and the powers it doesn't have. I think it's made an important contribution. I think that ultimately taxing and spending, this is at the heart of democracy is we elect, at each election, we elect politicians on the basis of what they are promising to do, partly with our services, partly with other things, but partly also with the public finances.

14:17Ed Conway:How much taxing is there going to be? How much spending is there going to be? How much borrowing is there going to be? And so when you have an institution that is so important in that, then I can understand why people are kind of nervous about it. Completely. But if you want an example of the power, of the reach of the OBR, just look at circumstances in which senior politicians have ignored it. Liz Truss and Kwasi Kwarteng amongst them. And the funny thing is that episode was perhaps the biggest that bolstered the OBR's kind of significance and power more than any other episode in its history.

14:48Ed Conway:And ironically enough, you know, there was so much going on in that period. And again, let's not let's not kind of relive the whole thing. But there was so much going on. One part of it, the fact that the government was laying down a massive set of tax cuts without actually providing any evidence for how it would work or how it would be paid back. But on top of that, you know, other things were going on. And one of those other things that was going on was that they were saying, well, also, oh, we don't really feel like we need to consult the OBR on this stuff. And then the markets went crazy. And there was this bizarre moment of the OBR kind of turning up at Downing Street and being summoned in by Liz Truss, basically to show that she was listening to them now as she was trying desperately to get things back in order.

15:34Ed Conway:And obviously, Labour won the next election on the basis of not being, you know, the number of times Liz Truss came up in that election, you couldn't count them. And it was on the basis of doing things differently. And one of the ways that Rachel Reeves said very quickly early on in her tenancy, she was going to do things differently, is she was never going to be able to have a fiscal event without consulting the OBR. So their position was enshrined and empowered in a way that I think, you know, even I, who I'm kind of a fan of the OBR, was thinking, well, you know, maybe we're going a little bit far in terms of the amount of faith that we're putting into them as an institution.

16:07because ultimately I do think, you know,

16:11Ed Conway:politicians are the ones we elect and they ultimately should be the deciders on what is happening to taxes and what is happening to spending, not unelected officials. Well, let me ask what may prove a difficult question for someone who is self-admittedly an OBR fanboy. I mean, I don't know if I'm a fanboy, but you know. You did say you were a fan. You did say you were a fan. I am, okay, so here's my skew. I like charts I can't lie I like charts and I like the fact that more of this stuff is done in the open than it was before and so we can see some of the workings in a way that we couldn't and that's kind of helpful But for how much longer that was going to be my question because frankly isn't there an existential threat to the OBR now that we are seeing criticism from people external to parliament we're seeing it from both sides of the Commons Chamber I mean when that happens things do tend to have a shelf life Yeah, I think this is a dangerous period for the OBR.

17:08Ed Conway:And I think it might have been dangerous had it not been for the disaster of this legal inadvertent release. But this has given the government and the prime minister, who tends to like occasionally firing people, an opportunity maybe to lay into the OBR. I think this government would never abolish it, given how they came into office saying that this was... an incredibly important institution, but they might well ask for someone to, you know, to be replaced. Clip its wings somehow. Yeah, and it involves a kind of clipping of its wings. What could replace the OBR then? Simple question. Before the OBR was there, these decisions were taken by government.

17:51Ed Conway:And there's no inherent reason why a government itself can't decide fiscal policy and come up with its own forecasts. It's basically what happened with the OBR in practice is a lot of the forecasting job that was done within the Treasury suddenly was hived off to this other body and they kind of had a boss that wasn't directly the chancellor. In its current form then, Ed, do you think the OBR is too powerful? Oh, well, that's just like a philosophical question, isn't it? I mean, yeah. I mean, it's up there with economics philosophy, yeah. I think they've been given too much power. Yeah, but that's a slightly kind of tricksy answer because they've been given too much power because governments have signed up to fiscal rules.

18:37Ed Conway:And as soon as you've got a rule and you say, I'm keeping to that rule, then everything is about how close to that line you are. You've drawn a line and then the OBR's job is always to say where you are in relation to something. So they'll just do that. And so fiscal rules give them this extraordinary amount of power that I don't think they really should have. I would find a rule that didn't allow the OBR quite so much definitive say on how close you are of breaking or missing your rule. And that's kind of doable. We can do it within the current set of institutions we have right now without having to throw everything out.

19:11Ed, always a pleasure. Thanks again.

19:13Ed Conway:Thank you. That's your lot for The Daily. Do scroll back for the rest of the episodes from this week, including designer babies, national service in Europe, and a jargon-free explanation of what actually happened in the budget. And you can find a video version of the chat with Ed over on the Sky News YouTube channel. The Daily's back Monday. Till then, take care.

19:48Ed Conway:How does a banana trigger a CIA-backed coup? Do AirPods herald the arrival of a new global order? What do LED lights say about the future of humanity? I'm Ed Conway and in each episode of my new podcast Stuff Matters I take an object crack it open and reveal the world-shaping forces hidden inside This is economics told through the things we think we understand Search Stuff Matters on your podcast app to listen and follow